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The EUR has been savaged of late after the ECB suggested it will ease policy in the upcoming June 5 meeting. The question though is, in what shape will easing materialise?
Last week we heard from a range of ECB officials, however it was the comments from the hawkish component of the ECB that caught the EUR bears’ attention and suggested perhaps it is actually time to position themselves for a bigger downside move.
While comments from the Bundesbank have been widely talked about, we also heard from Austrian National Bank governor Nowotny (a key hawk) saying that the ECB would consider multiple measures, although simply cutting the refinancing rate might not be sufficient.
It is clear that the market is sensing that the ECB could be behind the curve and will need to act fairly aggressively.
On the billing this week we get to hear the views of ECB members Mersch, Draghi, Coeure and Nouy; any information on exactly what the ECB plans to do on June 5 will be key. I believe the June 3 eurozone ‘flash CPI’ print is key and any number 0.8% or below will cement the EUR’s fate.
On the USD side of the equation, I feel the market has become too heavily long US treasuries (with lower yields acting as a headwind for the USD); despite the technicals suggesting we could see lower levels, I feel we are starting to see signs of inflation in the US. It’s worth pointing out that the market consensus is that the US ten-year should be around 3.25% in Q4. This should support the USD and help to push the USD towards 1.30 by the end of the year.
Looking at the technicals, EUR/USD printed a bearish reversal on May 8 before going on to close below the July uptrend. The pair went on to trade down to 1.3648, but found good buying below the double top neckline at 1.3672 (as shown on the chart). The good bid that came into the market suggests we could see a move higher and this is my rationale for selling rallies here.
A subsequent close below the double top neckline would suggest and move towards 1.3400 and will be widely talked about among traders.
The 200-day moving average at 1.3628 will also be in play.
Looking at the stochastic indicator on the daily chart, it seems the pair is oversold and again selling into 1.3750 seems logical.
I want to place a potential stop loss above the 61.8% retracement of the recent sell-off (at 1.3862) in case the trade goes against me.
The prospect of central bank policy divergence (in terms of rhetoric towards their underlying currency), signs of inflation in the US and bearish technicals suggest EUR/USD seems a good sell on rallies candidate.
I have also look at selling rallies in CHF/JPY last week, which is another way of playing ECB action.